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U.K. domestic stocks may shake off their pariah status as beaten-down banks, housebuilders and retailers would be the biggest winners if the U.K. and European Union agree a deal on Brexit before the U.K. is scheduled to leave the bloc on Oct. 31.
After a red-letter day for U.K.-exposed stocks on Friday amid signs of progress in talks, all eyes turn to next week’s EU Summit. The U.K.’s FTSE 250 index closed the week 4.2% higher, posting its best day since May 2010.
“If there was a Brexit deal, political uncertainty would be reduced, sterling would appreciate, and that would be naturally positive for U.K. domestics and negative for international companies,” Matthew Hall, portfolio manager at Allianz Global Investors, said in an interview, adding that housebuilders and U.K. banks should see the biggest gains.
With a crucial few days ahead, here’s a roundup of some of the biggest stock-market winners -- and losers -- if a Brexit deal is clinched:
U.K. high street lenders have been among the stocks hardest hit by Brexit uncertainty, and analysts at Citigroup Inc. predicted in August that a no-deal scenario could cut their earnings by as much as 25%.
Both Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc’s shares surged on Friday. RBS -- the “poster child” of no-deal risk fears, according to Bloomberg Intelligence’s Jonathan Tyce -- rallied as much as 16%, the most in almost a decade.
Even after Friday’s jump, RBS shares are still down about 13% since the referendum, while Lloyds is down about 18%. A deal would clarify the risk around small and medium-size enterprise lending, Tyce said in a note, while also preventing a Labour victory in any potential election as well as further rate cuts by the Bank of England.
Smaller U.K. companies would also benefit from a deal. This summer saw a string of British companies warn of the impact Brexit will have on their businesses, including firms such as recruitment agency PageGroup Plc, car dealer Pendragon Plc and property firm Savills Plc, while Thomas Cook Group Plc, a stalwart of the travel world, went bankrupt.
Among other FTSE 250 members, Dixons Carphone Plc and Card Factory Plc have been hit by the slowdown in spending weighing on Britain’s high street, and are down 70% and 51% respectively since the Brexit vote. The worst-performer in the Index, subprime lender Provident Financial, has shed more than 80% as more customers have struggled to repay while it grapples with U.K. regulatory probes into its lending practices.
British housebuilders have been under pressure amid Brexit uncertainty and Morgan Stanley predicted last month that the group could gain 20% if a deal was reached, or drop 18% in a no-deal scenario.
Crest Nicholson Holdings Plc, which focuses on London and the surrounding commuter areas, has plummeted 31% since the referendum, while FTSE 100 member Taylor Wimpey Plc, also with big operations in the capital, has dropped about 15%.
“We believe Taylor Wimpey is best-placed amongst U.K. housebuilders to gain from a post-Brexit market bounce back,” HSBC Holdings Plc’s Brijesh Siya wrote Oct. 9, citing the company’s strategy of building large sites and its potential to cut costs.
U.K. retailers have suffered as consumers curtailed spending amid uncertainty about how the economy would fare. The FTSE 350 General Retailers Index is down about 20% since the Brexit referendum.
With more clarity, consumer and business confidence would both rise and the whole retail sector would benefit, Shore Capital analyst Clive Black said. Supermarkets would feel the impact of a stronger pound more quickly than non-food retailers, given they have shorter lead times on buying products from overseas, with Marks & Spencer Group Plc and Tesco Plc likely among the biggest beneficiaries.
Utilities investors have been hoping to avoid a Jeremy Corbyn government. The Labour leader has vowed to nationalize swathes of Britain’s water and energy firms, along with the railways and postal group Royal Mail Plc.
If a Brexit deal increases the Conservative Party’s chances of winning an election, that could be positive for the sector. RBC Europe analyst John Musk wrote last month that an election would be a chance to scrutinize Labour’s “unchecked rhetoric” on the sector.
National Grid Plc and United Utilities Group Plc are among the utilities stocks to watch. They’re down 17% and 10% respectively since the 2016 vote.
On the other hand, if a deal is cemented, the resulting gain in the pound may negatively impact exporters to the U.S., which have benefited from the currency’s weakness against the dollar. Analysts at Morgan Stanley said in August that U.K. drugmakers GlaxoSmithKline Plc and AstraZeneca Plc would benefit from a no-deal scenario and could see their valuations lowered by 8% and 11%, respectively, if a deal is reached.
A strong pound is also negative for Diageo Plc, which slumped as much as 4% on Friday. Every 1% move against the dollar is worth about 0.5% of the London-based beverage giant’s earnings per share, Jefferies analyst Ed Mundy said in an email.
Other stocks to watch include British American Tobacco Plc, Reckitt Benckiser Group Plc and Victrex Plc.
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